Say It Ain’t So, Joe

S enator Joe Manchin has reportedly told Democrat leaders he will not support the economic package they are seeking to pass through reconciliation, which requires only a simple majority in the Senate. But Manchin has indicated he will support a bill that imposes price controls on Medicare drugs.

Say it ain’t so, Joe. The proposal is unnecessary, and it will harm Americans by decreasing access to innovative new drugs and decreasing life expectancy.

This is the third iteration of recent Democratic efforts to dictate drug prices in the Medicare program. While the three versions differ in small specifics, they all purport to lower drug prices by allowing the secretary of Health and Human Services to directly “negotiate” with drugmakers. All would revoke the provision in the original Medicare Part D prescription drug statute prohibiting the HHS secretary from interfering in negotiations between private Part D plan sponsors and drugmakers and allow controls on prices for Medicare drugs. The bill also limits annual drug-price increases to the rate of inflation and imposes severe monetary penalties for exceeding allowed prices.

This is negotiation, Godfather-style. The drugmaker gets to counter-offer, but ultimately, the HHS secretary — who oversees huge government drug purchases — makes a price offer that manufacturers can’t refuse.

Is this new regime necessary? Overall inflation numbers are frightening: Prices are up 9.1 percent the past year, 1.4 percent just in the past month. But prescription drug prices are up just 2.5 percent year-to-year and have been basically flat for the past three months.

While critics decry the cost of a few new, specialty drugs, total drug spending growth (both outpatient and in-hospital) has been stable the last 15 years and has been lower than the growth in health-care spending. In fact, total U.S. drug spending as a percentage of health expenditures is lower than the average percentage of eleven developed countries.

The Congressional Budget Office (CBO) reported that real per capita spending on prescription drugs began to level off in the mid 2000s. The CBO found that the average net price of a prescription — the price after subtracting the discounts and rebates off list prices that manufacturers provide to private and government buyers — fell from $57 in 2009 to $50 in 2018 in the Medicare Part D program and from $63 to $48 in the Medicaid program.

Moreover, it is not even clear that the proposal will effectively address high prices. The HHS secretary selects negotiation-eligible drugs by picking single-source drugs with the highest Medicare expenditures over the preceding year. But expenditures can be high because prices are high, or because large quantities are used. That means that drugs could be subject to regulated prices simply for being high volume. This might punish valuable products because they treat large numbers of patients, as opposed to having unreasonably high prices. Furthermore, some biotech/biologic products will be excluded from the negotiation process, and these are often the most expensive drugs.

The proposed price controls will have serious side effects, thereby discouraging the development of innovative new drugs. New drugs reduce the price of health by reducing the need for other medical services and by extending and improving the quality of life. New drugs transformed HIV from a death sentence to a chronic disease. New drugs cured life-threatening and debilitating Hepatitis C, replacing drugs that were expensive, only moderately effective, and had severe side effects.

Pharmaceutical companies invest in research and development in anticipation of future profits. Take away profits and R&D will wane, leading to fewer new drugs and poorer health.

Without revealing its methodology, CBO estimated that the negotiation provisions in the first iteration of price negotiation proposal — H.R. 3, the Lower Drug Costs Now Act of 2019 — would result in eight to 15 fewer drugs coming to market over the ensuing decade. But a detailed analysis by the Council of Economic Advisers (CEA) estimated that the bill could lead to as many as 100 fewer drugs entering the United States market over the decade, about a third of the total number of drugs expected to enter the market during that time. CEA estimated this decreased access to lifesaving drugs would reduce Americans’ average life expectancy by about four months.

University of Chicago economist Tomas Philipson estimated that the price controls in the second iteration of the proposal — Joe Biden’s Build Back Better bill — would lead to a 29 percent to 60 percent reduction in R&D, and 167 to 342 fewer new drug approvals over the next 20 years.

While the current, nearly identical Senate proposal will initially regulate fewer drugs than earlier proposals, there is little reason to believe that the regulated number of drugs will not grow. The impact on future R&D will likely be as bad as in the earlier proposals, resulting in fewer life-saving brand drugs that eventually become the inexpensive generic drugs that account for nine out of ten prescriptions in the U.S.

There is no compelling reason to tinker with what has been a successful system. Part D was set up as a market-oriented program where private-plan insurers compete for enrollees based on benefits and price, such as premiums and cost sharing, and negotiate drug discounts to keep costs down. Roughly 50 million Medicare beneficiaries (three quarters of the Medicare population) have voluntarily enrolled; costs have consistently been below projections; the average enrollee has a choice of 57 different plans; and more than 80 percent of enrollees are satisfied with the program.

Hopefully, Senator Manchin will reconsider his support for the drug-price control proposal. Otherwise, when the next pandemic hits, there may not be an innovative pharmaceutical industry that has performed the research needed to produce new therapeutics and vaccines in record time.